HW9_sol - insurance You are bullish on XYZ but nervous...

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Purdue University Krannert School of Business MGMT 411: INVESTMENTS Assignment #9, Solution 1. XYZ stock is trading $50. You anticipate a big move either up or down over the next six weeks with a possible increase in volatility. You decide to buy one June 50 strike call at $3.20 and one June 50 strike put at $3.00. Both options are European. Suppose that these are possible outcomes at expiration: XYZ Price Value of Call Option Value of Put Option Your Net Profit (Loss) 60 55 50 45 40 a) Fill in the empty cells in the table above. XYZ Price Value of Call -Cost Value of Put - Cost Your Net Profit (Loss) 60 $6.80 ($3.00) $3.80 55 $1.80 ($3.00) ($1.20) 50 ($3.20) ($3.00) ($6.20) 45 ($3.20) $2.00 ($1.20) 40 ($3.20) $7.00 $3.80 b) Briefly describe the point of this strategy. This is a straddle so you profit when volatility is high. 2. XYZ is at $117. You own 100 shares and want to hold on until 2012 for tax reasons, and willing to pay a cost for
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Unformatted text preview: insurance. You are bullish on XYZ, but nervous about unseen events over the next couple of years. You decide to buy one XYZ January 2012 110 put for 13 or $1,300.00. Suppose that these are possible outcomes at expiration: XYZ Price Value of Put Option Value of Stock Your Net Profit (Loss) 160 145 130 117 110 100 a) Fill in the empty cells in the table above. XYZ Price Value of Put Value of Stock Your Net Profit (Loss) 160 $0.00 $4,300.00 $3,000.00 145 $0.00 $2,800.00 $1,500.00 130 $0.00 $1,300.00 $0.00 117 $0.00 $0.00 ($1,300.00) 110 $0.00 ($700.00) ($2,000.00) 100 $1,000.00 ($1,700.00) ($2,000.00) b) Briefly describe the point of this strategy. This is a protective put....
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This note was uploaded on 02/06/2012 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue.

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HW9_sol - insurance You are bullish on XYZ but nervous...

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